Reservation Wages and Unemployment Insurance

43 Pages Posted: 27 Oct 2006 Last revised: 27 Jun 2010

See all articles by Robert Shimer

Robert Shimer

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Iván Werning

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: October 2006

Abstract

This paper argues that a risk-averse worker's after-tax reservation wage encodes all the relevant information about her welfare. This insight leads to a novel test for the optimality of unemployment insurance based on the responsiveness of reservation wages to unemployment benefits. Some existing estimates imply significant gains to raising the current level of unemployment benefits in the United States, but highlight the need for more research on the determinants of reservation wages. Our approach complements those based on Baily's (1978) test.

Suggested Citation

Shimer, Robert J. and Werning, Ivan, Reservation Wages and Unemployment Insurance (October 2006). NBER Working Paper No. w12618, Available at SSRN: https://ssrn.com/abstract=938411

Robert J. Shimer (Contact Author)

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Ivan Werning

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